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Pakistan Looks to Wind Power in a Crisis

By Aedan Kernan, Greenwell Consulting

March 2012

With electricity demand doubling every ten years, Pakistan is suffering from major power shortages. In an effort to encourage new sources of energy, Pakistan’s national electric power regulatory authority has proposed a feed-in tariff for wind power projects of nearly 15 U.S. cents per kWh. The tariff will run for 20 years and be limited to projects of 5MW to 250MW that close before the end of 2012.

The proposed tariff is one of the highest on offer in the world, according to Mr. Akhtar Ali, author of Pakistan’s Energy Development: the Road Ahead and a former Harvard Fellow on energy policy. Most tariffs around the world vary between 8 and 12 cents. Pakistan first offered a tariff of 9.5 cents per kWh in 2006, but it was not attractive enough to encourage development. Pakistan’s only installed wind farm, of 6 MW capacity, was built by a Turkish wind farm developer for a tariff of a little less than 12 cents.

Speeding and Streamlining the Process

The tariff is at the centre of a range of initiatives designed to make investment in wind power more attractive to domestic and external investors. Other components of the package include making leased land available for the life of projects at just $10 per acre, guaranteeing all electricity produced will be purchased, and providing assistance for environmental impact assessments and streamlined government permissions. As a part of these initiatives, dividends declared during the life of the project would be taxed at 7.5% and revenues from certified emission reductions would be shared with the government.

The government’s efforts are attracting interest. Recently, NBT, a Norwegian power project developer, declared its intention to invest $1 billion to build 500MW of wind projects in Pakistan. They would complete the first 250MW within 18 months of reaching agreement with the government. Other European and Chinese companies are applying for wind power tariffs.

A mountainous country with considerable coastline, Pakistan possesses an estimated wind power generation capacity of over 350 GW. The initial development sites in Sindh State, near the sea in southern Pakistan, provide excellent conditions combined with easy access and proximity to major centres of population.

Energy Crisis

Finding a solution to Pakistan’s power shortages is urgent. Regular load shedding has led to violent riots followed by high-level government emergency energy summits. Part of this volatility is due to Pakistan’s dependence on oil, with over $10 billion spent on oil imports each year. According to Akhtar Ali, the oil price rises in 2007 and 2008 severely damaged the Pakistani economy, and government leaders are eager to find a more stable alternative.

Subsidy a Necessary Handicap

Retail electricity costs are subsidised by the government to ensure the poor have access. However, the government has at times delayed or failed to pay the subsidy to the power producers. At times, that has left the power producers unable to purchase fuel, resulting in generation close downs. To add to the problems, transport and distribution losses average 25% nationally and collection of retail payments is patchy.

In this context, the government’s desire to offer an attractive tariff for wind power is understandable. "I don’t think they would be able to buy more than a few projects at this rate," says Akhtar Ali. "This will increase the average cost of electricity substantially and there are already problems paying for electricity."

Domestic wind turbine production is needed to reduce dependency on subsidies, according to Akhtar Ali and Professor Muhammed Aslam Uqaili from the Department of Electrical Engineering at Pakistan’s Mehran University. Local production would help to keep costs down and help to cope with the risks of currency fluctuation.

The starting point for a healthy electricity system capable of investment in its own development is to eliminate as much of the losses and subsidy as possible. Because of the low incomes of much of the country, subsidies will likely be in place for some time, but there are areas where retail charges could rise.

In the meantime, Akhtar Ali expects the government’s wind tariff rates will encourage development. "The risk somewhat dilutes the effect of the high tariff rate," he says. "But on balance, I think there will still be sufficient residual incentive that would bring forward the local and foreign investors."